Wall Street banks and their foreign rivals have paid out $100bn in US legal settlements since the financial crisis, according to Financial Times research, with more than half of the penalties extracted in the past year.
The sum reflects a substantial shift in political attitudes towards banks, as regulators and the Obama administration seek to counter perceptions that bankers have got off lightly for their role in the financial crisis.
The milestone comes amid signs that banks’ legal costs could rise further, with a number of large banks still under investigation by the task force set up by Barack Obama in 2012 and the political backlash still under way.
During stress tests last week, the Federal Reserve found that the biggest banks could still face a further $151bn bill for operational risk, repurchasing soured mortgage bonds and dealing with the falling value of buildings they own. Lawyers believe the bulk of this estimate is made up of expected litigation costs, suggesting the Fed is concerned that banks have misjudged badly their legal exposure.
Last week’s $885m deal between Credit Suisse and the Federal Housing Finance Agency took the settlements to $99.5bn, of which $15.5bn came from foreign banks, according to an FT study of 200 fines and restitutions since 2007. Just over $52bn of the total was paid out in 2013 alone. America’s six big banks – JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Morgan Stanley and Goldman Sachs – had combined earnings of $76bn in 2013, just short of their collective peak in 2006.
The settlements and restitutions range from a high of $13bn, agreed to by JPMorgan Chase in a deal with the justice department, to fines as low as $1m. They span penalties levied by agencies such as the Commodity Futures Trading Commission and mortgage repurchases from Fannie Mae and Freddie Mac, the quasi-governmental US mortgage insurers.
The White House toughened its line from 2012 after complaints from Congress and Democratic voters about the failure to punish big banks for their role in the crisis compared to the impact on the broader community.
Despite the large headline number and huge fines paid by individual banks, critics say they may have little impact on institutions with the capacity to easily absorb such penalties.
“The fines can be viewed as [a] ‘cost of doing business’,” said Anat Admati, of Stanford University. “They don’t get at the heart of the problem, and aren’t effective to change behaviour, because the strong incentives by individuals within the banks to keep engaging in the same practices remain in place.”
However, Tony Fratto, of Hamilton Place Strategies in Washington, said the fines were “very substantial, in some cases orders of magnitude larger than anything we’ve seen in the past”, and came on top of higher compliance costs imposed after the crisis.
The fines can be viewed as [a] ‘cost of doing business’. They don’t get at the heart of the problem, and aren’t effective to change behaviour, because the strong incentives by individuals within the banks to keep engaging in the same practices remain in place– Anat Admati, Stanford University
“If the goal is not to shutter banks, but to impress upon them the public interest in adhering to the law, and to better account for risk, the fines go beyond what was necessary,” he said.
The more aggressive approach came after years in which the Obama administration had been criticised for not extracting enough big penalties from banks or pressing criminal charges against top executives.
The justice department and Eric Holder, the attorney-general, in particular, were repeatedly taken to task by Congress and sections of the media for failing to go after financial institutions.
In March last year, Mr Holder acknowledged before a congressional committee that some banks were “too large” to prosecute without risking a “negative impact” on the economy.
Since then, his approach has significantly toughened, along with the ratcheting up of pressure on Capitol Hill.
Two senators, Elizabeth Warren, a Democrat and an outspoken critic of Wall Street, and Tom Coburn, a Republican, introduced a bill in January that would force agencies to reveal the details of settlements reached with banks and other companies accused of wrongdoing.
Ms Warren earlier this month again called into question the effectiveness of regulatory enforcement in light of the recent pay increase for JPMorgan Chase’s CEO Jamie Dimon.
At a Senate Banking Committee hearing, she questioned how Mr Dimon could receive a “fat pay bump” to $20m in 2013, a 74 per cent increase from the previous year, even after the bank had paid out record fines.
“I’m not confident the enforcement system is doing nearly enough,” said Ms Warren, adding that the settlements did not appear to be translating into a deterrent for bad behaviour.
The fines cover the banks’ practices in the foreclosure business, lending practices, market manipulation and fraudulently issuing mortgage-backed securities.
Additional reporting by Tom Braithwaite in New York